UK watchdog cracks down on anti-competitive banking practices

LONDON – Banks unfairly favour big fund managers when it comes to doling out shares in company listings and this must change, Britain’s Financial Conduct Authority (FCA) said on Wednesday.

The watchdog’s findings are from a study that started in May into competition within investment and corporate banking, a sector that generated $17 billion in gross fees in the United Kingdom in 2014.

The regulator also wants to end contractual clauses that tie clients to a bank for a range of services. The study found cross-subsidies between corporate and investment banking lead to a bundling of services, where customers can end up using the same bank for several products.

“Our study shows that many investment and corporate banking clients are getting a service they want, but we have also identified some areas where improvements could be made,” FCA director of competition, Christopher Woolard, said.

“Overall, this is a package of proportionate measures intended to remove potentially anti-competitive practices,” Woolard said in statement.

The 186-page report starts a public consultation into changing how parts of the market work, such as the way companies are floated using initial public offerings (IPOs).

The study found allocations of shares in company flotations were “skewed towards buy-side investors from whom banks derive greater revenues from other business lines”.

“As a result, the watchdog will undertake supervisory work with a targeted group of banks to better understand how potential conflicts of interests are managed when shares in IPOs are allocated.”

The FCA has proposed that research from a bank working on an IPO should be delayed until after the prospectus is published, and that analysts not connected to the listing should also get access to the company’s management.

The watchdog’s aim is to make the prospectus the primary source of information for investors, rather than the research from the analysts at banks working on the listing, and to put analysts on a more equal footing.

“If we can change the blackout period, I think some investors would welcome it. Investors are telling us they want more time to read the prospectus as they mull over an IPO investment,” said Craig Coben, co-head of global equity capital markets at Bank of America Merrill Lynch.

NO CLAUSES

The watchdog said it was calling for an end to the use of contractual clauses that tie clients to using the same bank for a range of services.

It said customers, in return for below cost lending and corporate broking services, are often pressured to “reward” the same bank when it comes to advising on issuing new shares, which can earn the bank a bigger fee.

“The provision of cheap lending and corporate broking makes it harder for those banks providing only transactions services to compete,” the watchdog said.

Rob Moulton, regulation lawyer at Ashurst, said investment banks often provide free services to fledgling companies in the hope of securing future work.

“Telling investment banks that they cannot have a right of first refusal on more lucrative future work may make them more reluctant to provide free services at the earlier stage, leading to increased costs for SMEs,” Moulton said.

The FCA is also looking to the banking industry to address concerns that league tables for investment and corporate banking services may be “unreliable.”

The watchdog said these concerns mean the tables are at best ignored by clients, and at worst could distort clients’ decision making.

Bankers often use rankings in tables to help boost their careers and bonuses.

The regulator said some banks carry out loss-making transactions purely to move higher in the tables and “routinely present the tables to clients to inflate their own position”. –Reuters